The Hongkong and Shanghai Banking Corporation Limited 2016 consolidated results – highlights
Profit before tax down 12% to HK$102,707m (HK$117,279m in 2015)
Attributable profit down 12% to HK$78,646m (HK$89,533m in 2015)
Return on average ordinary shareholders’ equity of 13.0% (15.9% in 2015)
Total assets up 9% to HK$7,549bn (HK$6,954bn at 31 December 2015)
Common equity tier 1 ratio of 16.0%, total capital ratio of 19.0% (15.6% and 18.6% in 2015)
Cost efficiency ratio of 44.5% (42.0% in 2015)
Comment by Stuart Gulliver, Chairman
Asia’s economic growth stabilised during the second half of 2016, as export volumes and demand picked up, commodity prices improved and deflationary pressures eased, although overall levels of trade and demand remained relatively subdued. Mainland China’s economy benefited from fiscal measures that underpinned steady growth, with strong infrastructure investment and recovery in the property market, while producer price increases helped to support corporate profits and maintain business confidence. Hong Kong’s economy improved during the second half of 2016, largely due to strength in the property market, coupled with upturns in retail sales and tourist volumes. Domestic demand continued to be supported by a robust labour market and stable personal income growth. In ASEAN, Indonesia continued to show steady expansion, while the economies of Malaysia and Singapore both experienced slowing rates of growth. In India, market conditions are normalising as remonetisation takes place, and economic growth is returning to previous levels. Australia’s economy benefited towards the end of the year from rising commodity prices and improving retail sales.
In this environment, The Hongkong and Shanghai Banking Corporation Limited recorded profit before tax in 2016 of HK$102,707m, compared with HK$117,279m in 2015 which included a gain on partial disposal of Hang Seng Bank Limited’s (‘Hang Seng’) shareholding in Industrial Bank of HK$10,636m. Excluding this gain, profit before tax in 2016 reduced by 4% compared with the prior year, while net operating income before loan impairment charges was 3% lower, principally due to a reduction in wealth management income from lower retail brokerage and unit trust income as the strong market conditions experienced in the first half of 2015 were not repeated. Costs also fell by 3% as we delivered cost savings while continuing to invest in growth initiatives and in regulatory and compliance programmes. The cost efficiency ratio for the year was 44.5%. Loan impairment charges of HK$5.6bn remained low in relation to average customer advances. Loan impairment charges were higher in Hong Kong, where the prior period included a release in Global Banking & Markets (‘GB&M’) which did not recur, while loan impairment charges reduced in Indonesia, mainly in Commercial Banking (‘CMB’).
Loans and advances to customers grew by 4%, excluding the impact of foreign exchange movements, with growth in all three major businesses. We grew term lending in GB&M and CMB, and continued to grow residential mortgages in Retail Banking and Wealth Management (‘RBWM’). Customer deposits increased by 6%, principally in RBWM savings balances and Global Liquidity and Cash Management in GB&M and CMB, illustrating the depth of our customer relationships. At the end of December 2016, the advances-to-deposits ratio stood at 57.8%. Net interest margin reduced slightly compared with the prior year. Our capital position remained strong, with a common equity tier 1 ratio of 16.0% at the end of the year, up from 15.6% at the end of 2015.
We made significant progress on our strategy during 2016. In Hong Kong, we captured market share in key products including Global Trade and Receivables Finance, mutual funds, deposits and personal lending. In CMB, we grew lending despite slower conditions in global trade. In RBWM, we also achieved lending growth while maintaining profits, notwithstanding the reduction in wealth management revenues. Our strategy remains focused on capturing long-term opportunities in the development of Asia as the world’s leading economic region. We continue to invest in growing our business in India, ASEAN and mainland China. During the year we moved forward with our investment in the Pearl River Delta (‘PRD’), launching the credit cards business, gaining significant numbers of new RBWM and CMB customers, and growing both customer loans and revenues.
We also see significant opportunities in China’s Belt and Road initiative to leverage our international network in the coming years. For example, during 2016, we participated in energy sector deals linking mainland China to Malaysia. Future progression of the Belt and Road initiative is likely to boost further international use of the renminbi and, as Asia’s leading international bank, we are well placed to benefit from this. In 2016, we continued to strengthen our leadership position, consolidating our top market shares of the offshore renminbi bond and Qualified Foreign Institutional Investment Scheme custodian markets. In ASEAN, we completed the establishment of our locally incorporated subsidiary in
Singapore and continued with the integration of our business in Indonesia, which remains on track for completion in the first half of 2017. During 2016, we received a number of awards, including ‘Asia’s Best Investment Bank’ and ‘Asia’s Best Bank for Financing’ by Euromoney, and ‘Best Foreign Bank’ in mainland China, Malaysia, Sri Lanka and Vietnam by FinanceAsia. We consolidated our position as the leading international bank for renminbi services, and were named ‘Best Overall Offshore RMB Products and Services Provider’ by Asiamoney for the fifth successive year.
In RBWM, we maintained our leading market shares in cards, deposits and loans in Hong Kong, where we grew mortgage lending balances, with average loan-to-value ratios of 47% on new drawdowns and an estimated 29% on the portfolio as a whole. Following the launch of the credit cards business in the PRD, we are focused on using digital channels to expand our customer base in the region, and broaden the range of product offerings to include consumer finance in addition to deposit, wealth and residential mortgage products. We have also launched new credit card offerings in Malaysia, Taiwan and Indonesia. We continued to invest in our digital and automated platforms, launching Apple Pay in Hong Kong and Singapore, and Easy Pay in Hong Kong.
In CMB, we grew loans and deposits, particularly towards the end of the year, in response to customer demand and as we focused on providing an increased share of our customers’ banking requirements. Term lending increased in a number of markets and in Hong Kong, market share for trade finance also increased. We continue to collaborate with GB&M to leverage our network and provide financing to the supply chain of our global corporate customers. During the year, we launched Unified Payments Interface in India, a digital payments solution for corporates, and established a RMB2bn lending scheme to finance innovation initiatives of high-tech startups in the PRD. We are investing to adapt to new developments in world trade, both in goods and also in the rapidly growing trade in services, and are participating in the development of a blockchain Letter of Credit that will deliver trade services to our customers that are cheaper, faster, simpler and more secure.
In GB&M, we continued to build on our long-term relationships through our extensive global and local knowledge and provide a full range of services to corporate and institutional customers across Asia. We received widespread recognition for our Debt Capital Markets achievements through a number of key awards, including ‘Asia Bond House of the Year’ from IFR, and ‘Best Bond House’ from FinanceAsia. We secured a number of key mandates, including the first Panda bond issuance for a sovereign, by the Republic of Poland. Following the inclusion of renminbi in the International Monetary Fund’s Special Drawing Rights (‘SDR’), we participated in the first SDR denominated bond for the World Bank in mainland China. In Mergers and Acquisitions, we acted as advisor on a number of landmark cross-border deals in a range of industry sectors, including healthcare and power. We are committed to support the development of mainland China’s capital markets, and continue to seek the necessary regulatory approvals for our Securities joint venture with Shenzen Qianhai Financial Holdings, based in the Qianhai Special Economic Zone. Once operational, this will allow us to engage in the full spectrum of the securities business in mainland China.
While the risks of protectionist measures and the possible impacts of a stronger US dollar on indebted nations have increased, Asia’s economies are showing signs of improving economic performance. We expect mainland China to continue to generate steady annual GDP growth of 6.5% during 2017 and 2018. A significant proportion of Asia’s trade in goods and services now takes place within the region, and our universal banking business model gives us the flexibility to continue to find regional growth opportunities even in a world of slower globalisation. China’s Belt and Road initiative offers enormous business opportunities in connecting Asia’s growing economies, through accelerating infrastructure and industrial development. With its unrivalled capital market, financial, logistics and project management skills, Hong Kong is well positioned to be the gateway city to support many of these initiatives. At the heart of our strategy is delivering value from our network to finance trade, investment and capital flows, and to help our personal customers to manage their growing wealth. We will continue to focus on helping our customers to meet their needs and to grow in a complex and challenging world.
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